Changes to dividends from April 2016


13th October 2015

On Wednesday 8th July 2015 George Osborne delivered a summer budget and one of the most noteworthy changes announced was how dividends are taxed from April 2016, known as the Dividend Allowance. This means that from April 2016 a new tax-free Dividend Allowance will replace the Dividend Tax Credit.

Does this affect you?

The changes will have an impact on many businesses; typically it will affect limited company freelancers, contractors and small businesses using a low salary and dividend strategy for profit extraction (or, in fact those who simply take any dividends from their company). It is also worth noting that dividends received from other company investments will also be affected.

How does the current system work?

With the current structure (up until April 2016) any dividends you take out of your company during the tax year will attract no personal tax as long as it is in the lower tax band.

How will the system work from April 2016?

From April 2016 your first £5,000 of dividends will be tax-free. Any dividends above that but that still remains in the basic tax band (up to £43,000 for 16/17) will be charged at 7.5% and any dividends in the higher tax band will be charged at 32.5% (also additional rates apply at the upper rate of tax). Matthew Hodgson, partner at UHY Hacker Young said: "This will hit directors of small limited companies particularly hard - many of them are likely to view this as a direct attack”.

The government have issued a factsheet detailing how the Dividend Allowance will work, this can be found here.

If you’re worried about this change or unsure whether you or your business will be affected please don’t hesitate to contact us where we’ll be happy to advise you more on the matter. 

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